This Federal Register is in PDF Format

Publication Date: November 1, 2006

FRPart: III

Page Numbers: 64377-64400

Summary: Final regulations for the two new Title IV grant programs created by the HERA, the Academic Competitiveness Grant Program and the National Science and Mathematics Access to Retain Talent (SMART) Grant Program, are being published in a separate notice in the Federal Register.

Posted on 11-01-2006

[Federal Register: November 1, 2006 (Volume 71, Number 211)]
[Rules and Regulations]
[Page 64377-64400]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr01no06-21]

[[Page 64377]]

-----------------------------------------------------------------------

Part III

Department of Education

-----------------------------------------------------------------------

34 CFR Parts 668, 673, 682 and 685

Federal Student Aid Programs; Final Rule

[[Page 64378]]

-----------------------------------------------------------------------

DEPARTMENT OF EDUCATION

34 CFR Parts 668, 673, 682 and 685

RIN 1840-AC87

Federal Student Aid Programs

AGENCY: Office of Postsecondary Education, Department of Education.

ACTION: Final regulations.

-----------------------------------------------------------------------

SUMMARY: The Secretary is amending the Federal Student Aid Program regulations to implement the changes to the Higher Education Act of 1965, as amended (HEA), resulting from the Higher Education Reconciliation Act of 2005 (HERA), Pub. L. 109-171, and other recently enacted legislation. These final regulations reflect the provisions of the HERA that affect students, borrowers, postsecondary educational institutions, lenders, and other program participants in the Federal student aid programs authorized under Title IV of the HEA. Final regulations for the two new Title IV grant programs created by the HERA, the Academic Competitiveness Grant Program and the National Science and Mathematics Access to Retain Talent (SMART) Grant Program, are being published in a separate notice in the Federal Register.

DATES: Effective Date: These final regulations are effective December 1, 2006.

FOR FURTHER INFORMATION CONTACT: Ms. Gail McLarnon, U.S. Department of Education, 1990 K Street, NW., 8th Floor, Washington, DC 20006. Telephone: (202) 219-7048 or via the Internet at: Gail.McLarnon@ed.gov. If you use a telecommunications device for the deaf (TDD), you may call the Federal Relay Service (FRS) at 1-800-877-8339. Individuals with disabilities may obtain this document in an alternative format (e.g., Braille, large print, audiotape, or computer diskette) on request to the contact person listed under FOR FURTHER INFORMATION CONTACT.

SUPPLEMENTARY INFORMATION: On August 9, 2006, the Secretary published in the Federal Register interim final regulations with a request for comments (71 FR 45666) for the Federal student financial assistance programs. The interim final regulations were effective on September 8, 2006, and implemented most of the changes made to the HEA by the HERA, enacted as part of the Deficit Reduction Act of 2005 (Pub. L. 109-171). The interim final regulations also implemented changes made to the HEA by: The Taxpayer-Teacher Protection Act of 2004 (Pub. L. 108-409); certain provisions of Pub. L. 107-139; the Pell Grant Hurricane and Disaster Relief Act (Pub. L. 109-66); the Student Grant Hurricane and Disaster Relief Act (Pub. L. 109-67); and the Emergency Supplemental Appropriations Act for Defense, the Global War on Terror, and Hurricane Recovery, 2006 (Pub. L. 109-234). The August 9, 2006, interim final regulations included a request for public comment. This document contains a discussion of the comments we received and revisions to the interim final regulations that we made as a result of these comments. In the interim final regulations, we stated that changes to the final regulations made after consideration of the public comments would be effective July 1, 2007. After considering the comments we received, we have decided not to make any substantive changes to the regulations. We have made some technical and conforming changes that were identified during the public comment period, but these technical changes are not subject to the delayed effective date under section 482 of the HEA, and therefore become effective 30 days after publication of these final regulations.

Analysis of Comments and Changes

The changes to the interim final regulations included in this document were developed through the analysis of comments received on the interim final regulations published on August 9, 2006. We received 55 comments on the interim final regulations. An analysis of the comments and of the changes in the regulations since publication of the interim final regulations follows. We group major issues according to subject, with appropriate sections of the regulations referenced in parentheses. Generally, we do not address technical and other minor changes and suggested changes the law does not authorize the Secretary to make. We also do not respond to comments pertaining to issues that were not within the scope of the interim final regulations.

Definition of Telecommunications Course (Sec. 600.2)

Comments: A commenter representing accrediting agencies believed that the reference to ``regular and substantive interaction'' in the definition of telecommunications course was inconsistent with Congress' intent to permit institutions maximum flexibility in the development and application of curriculum, and placed an undue burden on accrediting agencies.

Discussion: The Secretary does not agree. The regulations do not restrict the curricula institutions may offer or the delivery modes they may use. Instead, the regulations reflect the clear distinction in the HERA between telecommunications courses and correspondence courses. This distinction is necessary because the HERA eliminated the circumstances under which telecommunications courses are considered correspondence courses, and excluded telecommunications courses from the ``50 percent rule'' limitations on institutional eligibility for Title IV, HEA program assistance, while retaining them for correspondence courses. Because of the changes made by the HERA, it is necessary to clarify the regulatory definition to distinguish telecommunications courses from correspondence courses. We have defined the term telecommunications course to conform to the usage of that term by the higher education community. None of the commenters proposed alternative language.

The revised definition of the term telecommunications course does not impose any new requirements on accrediting agencies. Since 1998, section 496(n)(3) of the HEA has required the Secretary to specifically designate whether recognized accrediting agencies have accreditation of distance education within the scope of their recognition. Since 1994, accrediting agencies have also been required under Sec. 602.22(a)(2)(iii) to provide prior approval for an institution's addition of courses or programs that represent a significant departure in the method of delivery from those previously offered. The interim final regulations do not modify these requirements, or add any new ones.

Changes: None.

Comments: While supporting our effort to draw a clear distinction between telecommunications and correspondence courses, one commenter thought that the language in the definition of telecommunications course was not specific enough to determine how much interactivity was sufficient. The commenter suggested that the definition be revised to include interaction among students and that we clarify that ``regular'' interaction means ``not trivial'' rather than ``at specific intervals.''

Discussion: The primary purpose of revising the definition of telecommunications course was to draw a clear distinction between telecommunications and correspondence courses. In drawing this distinction, we wanted to avoid as much as possible dictating a particular teaching method. The Secretary believes that requiring interaction among students, as well as between students and the
instructor, would preclude certain teaching methods, such as self-paced instruction. We disagree with the commenter on the meaning of ``regular'' interaction. We believe the phrase ``regular and substantive'' means that the interaction should both take place at regular intervals and not be trivial.

Changes: None.

Comments: Two commenters representing financial aid administrators supported the change in the definition of the term telecommunications course but asked whether instruction by video cassette or disc recording would be considered to be telecommunications coursework.

Discussion: We believe that the definition of telecommunications course adequately addresses the issue raised in the comments. The regulations provide that instruction by video cassette or disc recording is telecommunications coursework when the course involves the use of other telecommunications technologies for regular and substantive interaction between students and instructor, and when the course is offered onsite in the same award year. Otherwise, the use of video cassettes or disc recording is considered a correspondence course.

Changes: None.

Distance Education (Sec. Sec. 600.2, 600.7, 600.51, 668.8 and 668.38)

Comments: One commenter agreed that academic programs offered through any use of telecommunications or correspondence by foreign schools should not be eligible for Title IV, HEA program assistance. A few commenters did not believe that the HERA intended to deny eligibility under the Federal Family Education Loan (FFEL) Program to a student who physically attends a foreign school but takes a portion of his or her program through telecommunications classes. The commenters felt that it is unfair to bar from FFEL eligibility a student who could fulfill a program requirement only through telecommunications coursework because the class is not offered at the foreign school the student attends. One commenter suggested that U.S. military personnel deployed outside of the U.S. may need to take courses via telecommunications instruction as part of their program of study. The commenters recommended that the definition of an eligible program for a foreign school be modified to permit the inclusion of telecommunications courses. Specifically, the commenters suggested the definition be changed to include a program at a foreign school that requires on-site attendance in traditional classroom or lab settings in at least one class while permitting one or more additional telecommunications classes, while excluding a program at a foreign school that permits the student to attend courses solely via telecommunications instruction. Alternatively, the commenters suggested that the effective date of the regulations be changed to allow foreign schools to deliver second and subsequent disbursements of pending loans on or after July 1, 2006 if the first disbursement was made prior to July 1, 2006.

Discussion: The final regulations reflect the statutory requirements for an eligible program to include programs offered in whole or in part through telecommunications instruction by institutions in the United States with appropriate accreditation. The statute does not extend this eligibility to foreign schools and the Secretary does not have the authority to do so by regulation. In response to the comment regarding U.S. military personnel located abroad, it is the Secretary's understanding that such students do not usually attend foreign schools because they have access to programs offered by domestic institutions. Lastly, the effective date is established by the HERA and cannot be changed by regulation.

Changes: None.

Academic Year (Sec. 668.3)

Comments: One commenter suggested that the Secretary change the definition of an academic year so that institutions can use the same definition as they use for grade level in the Stafford Loan Program.

Discussion: The definition of an academic year in Sec. 668.3 reflects the statutory definition in section 481(a) of the HEA, and the Secretary cannot change that definition.

Changes: None.

Direct Assessment Programs (Sec. 668.10)

Comments: One commenter agreed that direct assessment programs offered at foreign schools should not be considered eligible for Title IV funding.

Discussion: The Secretary appreciates the commenter's support.

Changes: None.

Comments: One commenter representing several higher education associations, and two commenters representing financial aid administrators, asked how the Department will evaluate satisfactory academic progress for direct assessment programs.

Discussion: Students enrolled in direct assessment programs who are receiving Title IV HEA, program assistance must meet the same satisfactory academic progress requirements as do students attending other types of programs. However, since direct assessment programs may be designed in a variety of ways, we will determine how we will evaluate institutional compliance with satisfactory academic progress standards on a case-by-case basis as part of the initial eligibility review.

Changes: None.

Comments: One commenter thought that Sec. 668.10(a)(3) was intended to require an institution to develop a protocol for equating programs administered under direct assessment rules with clock hours for credit hour measurements, but that the text in the interim final regulations was unclear. The commenter suggested some revised language.

Discussion: The commenter is correct about the intent of the regulations. We agree that the commenter's proposed revised language is clearer than the language in the interim final regulations.

Changes: We have revised Sec. 668.10(a)(3) for clarity, but without changing the meaning.

Treatment of Title IV Funds When a Student Withdraws (Sec. Sec. 668.22, 668.35, and 668.173)

Post-Withdrawal Disbursement Counseling

Comments: Several commenters questioned why an institution must obtain the student's confirmation to apply loan funds to the student's account, but not to apply other Title IV program funds to that account. Several commenters questioned why an institution must obtain confirmation that a student wishes to receive grant funds as a direct disbursement. Commenters noted that the HERA provision that changed the post-withdrawal disbursement requirements addressed confirmation of receipt of loan funds, but not grant funds.

Discussion: As in the past, Sec. 668.164(d)(1) and (d)(2) require an institution to obtain a student's authorization (or a parent's authorization in the case of a parent PLUS loan) to credit the student's account with any Title IV, HEA funds for charges other than tuition, fees, and room and board if the student contracts with the institution for other services.

An institution may obtain such an authorization from a student or parent at any time. The HERA added a new provision that goes beyond the pre-existing requirements in Sec. 668.164(d)(1) and (d)(2) to require an institution to obtain confirmation from a student (or a parent in the case of a parent PLUS Loan) before making any post-withdrawal disbursement of loan funds. This confirmation cannot be made until the need for the post-withdrawal disbursement has been determined, i.e., after the student withdraws. This change ensures that a student or a parent has an opportunity after the student's withdrawal to decline all or a part of the loan, thus eliminating or reducing his or her loan debt. The Secretary did not add a similar change to the regulations for grant funds because she believes the requirements of Sec. 668.164(d)(1) and (d)(2) are sufficient to control the application of grant funds to a student's account. The requirement in Sec. 668.164(g)(3)(i) that an institution obtain confirmation that a student wishes to receive a post-withdrawal direct disbursement of grant funds is not new. Students are provided with an opportunity to refuse direct disbursements of grant funds so that they may preserve the amount of their grant eligibility if they return to school within the award year.

Changes: None.

Comments: Several commenters felt that the interim final regulations did not clearly explain how the requirements in Sec. 668.22 are applied in concert with the regulations for making a late disbursement (Sec. 668.164(g)(3)) and for notifying a student, or parent (for a parent PLUS Loan), to provide that student or parent an opportunity to cancel a loan when the institution credits the student's account with FFEL, Direct Loan, or Perkins Loan program funds (Sec. 668.165(a)(2)). Many commenters believed a conforming amendment was needed to clarify whether Sec. 668.165(a)(2) applies in the case of a post-withdrawal disbursement.

Discussion: The new confirmation requirements do not apply to late disbursements made to students who did not withdraw. Section 668.164(g)(3)(i) requires an institution to make any post-withdrawal disbursement due to a student who withdraws during a payment period or period of enrollment in accordance with the new post-withdrawal disbursement procedures. However, the new post-withdrawal disbursement requirements do not apply to late disbursements made to students who successfully complete the payment period or period of enrollment (Sec. 668.164(g)(3)(ii)) or to students who do not withdraw, but cease to be enrolled as at least half-time students (Sec. 668.164(g)(3)(iii)).

The commenters are correct that a conforming amendment to Sec. 668.165(a)(2) is necessary. For students who withdraw and are due a post-withdrawal disbursement, the new post-withdrawal disbursement procedures in Sec. 668.22 supersede the provisions in Sec. 668.165(a)(2) that require an institution to notify a student or parent of loan funds that are credited to a student's account. Because the new post-withdrawal disbursement procedures require an institution to obtain a student's confirmation (or a parent's confirmation in the case of a parent PLUS Loan), the institution does not have to notify the student or parent again when the institution credits the loan funds to the student's account after it receives the borrower's confirmation. The notification requirement in Sec. 668.165(a)(2) still applies in all other cases when an institution credits loan funds to a student's account.

Changes: The Secretary has revised Sec. 668.165(a)(2) to make it clear that an institution is not required to notify a student or parent of loan funds that are credited to a student's account for students who withdraw and are due a post-withdrawal disbursement.

Comments: Several commenters noted that requiring an institution to provide notification of the outcome of a post-withdrawal disbursement request ``electronically or in writing'' is redundant, because ``in writing'' means through conventional mailing methods or electronically.

Discussion: The commenters are correct.

Changes: The reference to electronic notification has been removed from Sec. 668.22(a)(5)(iii)(E).

Withdrawals From Clock Hour Programs

Comments: One commenter supported the new regulatory provisions governing the Return of Title IV Funds in the case of clock hour programs. One commenter felt that the regulations should allow an institution to determine the percentage of aid earned by a student who withdraws and has completed more clock hours than he or she was scheduled to complete by using the completed hours, rather than the scheduled hours. The commenter noted that this was consistent with the previous policy for students withdrawing from clock-hour programs.

Discussion: Prior to the enactment of the HERA, either completed hours or scheduled hours were used to determine earned aid for a student who withdrew from a clock-hour program. However, the HERA changed the law to allow the use of scheduled hours only.

Changes: None.

Grant Overpayment Requirements

Comments: One commenter suggested that the regulations be modified to clarify that the provision that a student is not required to return an original grant overpayment amount of $50 or less applies on a Title IV, HEA program-by-program basis.

Discussion: The Secretary agrees with the commenter.

Changes: Section 668.22(h)(3)(ii)(B) has been revised to make it clear that the provision that a student is not required to return an original grant overpayment amount of $50 or less applies on a Title IV, HEA program-by-program basis.

Comments: Several commenters asked the Department to raise to $50 the $25 de minimis amount for overpayments in the Academic Competitiveness Grant (ACG) and National SMART grant programs and other Title IV programs to match the de minimis grant overpayment amount for students who withdraw, which was raised to $50 by the HERA.

Discussion: The Secretary does not agree that the amounts should correspond. The $25 de minimis standard used in the regulations is based upon the Department's determination of the amount that is cost effective for the Department to collect on outstanding balances owed to the Department. We are able to successfully pursue collections of $25 or higher with Internal Revenue Service (IRS) offsets and other methods.

Changes: None.

Waiver of Grant Overpayment for Students Affected by a Disaster

Comments: One commenter felt that the regulatory language applying the waiver of grant overpayment for students affected by a disaster to students ``whose withdrawal ended within the award year during which the designation occurred or during the next succeeding award year'' was unclear. The commenter asked the Secretary to clarify that students remain eligible for the grant overpayment waiver even if they do not return to the same institution in the following year.

Discussion: An otherwise eligible student qualifies for the waiver if he or she withdraws during the award year during which the major disaster designation occurred or during the next succeeding award year, if the student withdrew because of the major disaster.

Changes: Section 668.22(h)(5)(iii) has been revised to clarify that the grant overpayment waiver applies to students whose withdrawal due to a disaster occurred, rather than ended, within the award year during which the designation occurred or during the next succeeding award year.

Order of Return of Grant Funds

Comments: One commenter felt that the regulations should be changed to make it clear that an institution will not have to return funds to both the ACG and National SMART Grant programs for the same withdrawal.

Discussion: Because an institution may opt to use the period of enrollment, rather than the payment period, to perform a Return of Title IV Funds calculation for a student who withdraws from a non-standard term or non-term program, it is possible, although highly unlikely, that both an ACG and a National SMART Grant could be disbursed (or scheduled to be disbursed) to a student for the same period. In such a case, funds from both the ACG and National SMART Grant programs may need to be returned for the same withdrawal.

Changes: None.

Return of Funds Within 45 Days

Comments: One commenter felt that the Secretary should extend the other deadlines under Sec. 668.22 from 30 days to 45 days to correspond to the extension of the maximum amount of time an institution has to return unearned funds for which it is responsible.

The commenter felt this extension should also be applied to notifications to students for post-withdrawal disbursements and notifications to students of Title IV grant overpayments resulting from withdrawal. The commenter asserted that a uniform deadline makes sense because the same Return of Title IV Funds process leads up to all three requirements, and consistency would help ensure compliance.

Discussion: Institutions have previously indicated that they needed an extension of the former 30-day return deadline to provide additional time to perform the administrative functions necessary to return the funds. The actual calculation of earned funds is not time consuming. The Secretary believes that providing institutions with over four weeks to enter information from their records and calculate the amount to be returned is more than sufficient. With regard to the request that the Secretary extend the 30-day deadlines for notifications to students, the Secretary does not believe it is in the best interest of students to extend these deadlines merely for consistency's sake. The Secretary believes that the sooner an institution attempts to contact these students, the more likely it is
that the institution will reach the students.

Changes: None.

Student Debts Under the HEA and to the U.S. (Sec. 668.35)

Comments: Several commenters suggested that Sec. 668.35(e)(3), which governs the amount of an overpayment that renders a student ineligible for additional Title IV, HEA program assistance, be changed from $25 to $50 to be consistent with the new statutory requirement governing repayment of grant funds under the return of Title IV aid provisions.

Discussion: The Secretary disagrees with the commenters. In 2002, we published final regulations to make the treatment of overpayments consistent in the Title IV, HEA programs, including incorporating the de minimis amount concept that applied to grant overpayments under the return to Title IV aid requirements. We decided to use the $25 deminimis standard for consistency and simplicity, and because it is cost effective. We do not believe it is appropriate to raise the minimis amount applicable to overpayments when the Department has the tools and resources available to collect these amounts. However, as a result of the change in the minimum amount of a grant repayment for which a student is responsible under the return of Title IV aid provisions from $25 to $50, we are amending Sec. 668.35(e) to clarify that a student who owes a grant overpayment of $50 or less that is not a remaining balance and is a result of the return of Title IV aid calculation is eligible to receive additional Title IV, HEA program assistance.

Changes: We have added a new paragraph (4) to Sec. 668.35(e) to clarify that a student who owes a grant overpayment of $50 or less under the circumstances explained above is eligible to receive additional Title IV, HEA program assistance.

Estimated Financial Assistance (Sec. Sec. 673.5, 682.200, and 685.102)

Comments: One commenter suggested that we add benefits paid under Section 903 of Pub. L. 96-342 (Educational Assistance Pilot Program) that is currently in the definition of estimated financial assistance in Sec. Sec. 682.200(b) and 685.102(b) to the definition of estimated financial assistance in Sec. 673.5(c). The commenter also suggested that we add language in Sec. 682.200(b)(1)(iv), which includes in the definition of estimated financial assistance benefits paid under the Veteran's Affairs Educational Assistance Pilot Program and language from Sec. 685.102(b)(2)(ii), which excludes from estimated financial assistance the amounts of Federal Perkins Loan and Federal Work-Study funds that the student has declined. Another commenter requested that the definition of estimated financial assistance in all three sections be modified to exclude any alternative or private loans not certified by the institution. This commenter suggested that only those loans that the institution is aware the student is receiving should be included in the definition of estimated financial assistance. An additional, similar comment was received suggesting that language be added to the definitions in all three sections to specifically state that only benefits that an institution is aware of must be considered estimated financial assistance.

Discussion: Although the list of individual veterans' education benefits in each of the three sections that define estimated financial assistance is not all inclusive, the Secretary agrees with the first commenter that, for consistency, benefits paid under section 903 of Pub. L. 96-342 (Educational Assistance Pilot Program) should be included in Sec. 673.5(c). However, it would be redundant to specifically exclude from the definition of estimated financial assistance in Sec. 673.5(c) the amounts of Federal Perkins Loan and Federal Work-Study funds that the student has declined. Section Sec. 673.5 defines the term estimated financial assistance for the purpose of determining eligibility for campus-based funds. It would not make sense to exclude campus-based funds declined by a student from the list of items used to determine that student's eligibility for those campus-based funds. If a student declines funds from a campus-based program, the amount of those declined funds would not be used to determine eligibility for campus-based funds. With respect to the proposal to define estimated financial assistance as including only loans of which the institution is aware, we note that, under the administrative capability guidelines in Sec. 668.16(b) and (f), an institution must have a mechanism in place for obtaining and reviewing all information it receives that has a bearing on a student's eligibility for Title IV, HEA assistance. The institution must communicate this information to the individual designated to administer the Title IV programs at the institution. In light of this requirement, we believe that it is unlikely that a student will be receiving loans of which the institution is not aware.

Changes: The definition of estimated financial assistance in Sec. 673.5(c)(1)(ix) has been revised to include benefits paid under section 903 of Pub. L. 96-342 (Educational Assistance Pilot Program). A technical change has also been made to correct the reference in Sec. 685.102(b)(1)(ix) from ``paragraph (2)(iii)'' to ``paragraph (2)(iv)''.

Military Deferment (Sec. Sec. 674.34, 682.210(t), 682.211(i) and 685.204)

Comments: One commenter recommended that we extend eligibility for the new military deferment established by the HERA to Perkins Loans disbursed before July 1, 2001 if the borrower received at least one Perkins Loan first disbursed on or after July 1, 2001.

Discussion: Section 8007(f) of the HERA specifies that the military deferment applies to loans ``for which the first disbursement is made on or after July 1, 2001.'' The Secretary does not have the authority to extend eligibility for the military deferment to loans for which the first disbursement was made before July 1, 2001.

Changes: None.

Comments: Some commenters asked if a qualified borrower who experiences multiple deployments could receive separate deferments for each of his or her eligible Perkins, FFEL and Direct Loan program loans, as long as each deferment period did not last longer than the three-year maximum.

Discussion: The three-year maximum for the military deferment applies to each loan, not to the borrower. If a borrower receives a military deferment on a loan for three years, or receives multiple military deferments on a loan that add up to three years, that loan no longer qualifies for a military deferment. If the borrower goes back to school, obtains more Title IV loans, and then is called back to active duty, the new loans would qualify for up to three years of military deferment. However, the older loan that has already been in a military deferment for the three-year maximum would not qualify for a military deferment.

Changes: None.

Comments: Several commenters recommended that we confirm that a lender has the authority to grant a mandatory administrative forbearance, as provided for in Sec. 682.211(i), on a borrower's pre-July 1, 2001 loans, if the borrower qualifies for a military deferment on loans that were first disbursed on or after July 1, 2001.

Discussion: FFEL lenders are required to grant mandatory administrative forbearances when notified by the Secretary that exceptional circumstances exist, such as a local or national emergency or a military mobilization. Some borrowers may qualify for a military deferment on loans first disbursed on or after July 1, 2001 and also may qualify for a mandatory administrative forbearance on loans first disbursed before July 1, 2001. However, not all borrowers who qualify for a military deferment necessarily qualify for a mandatory administrative forbearance.

Changes: None.

Comments: Several commenters recommended that we change the name of the prior military deferment that is available to borrowers with loans made before July 1, 1993, to the ``Armed Forces deferment'', to avoid confusion with the new military deferment enacted by the HERA.

Discussion: The FFEL and Direct Loan Public Service Deferment Request forms do not use the term ``military deferment'' to refer to the pre-July 1, 1993 military deferment mentioned in the comments. Instead, these forms refer to borrowers who are ``on active duty in the Armed Forces of the United States.'' These forms are the primary source of information to borrowers on the prior military deferment. Accordingly, we do not believe that there will be any significant confusion among borrowers. Moreover, we believe that re-naming the old military deferment in the regulations serves no purpose.

Changes: None.

Perkins Loan Rehabilitation (Sec. 674.39)

Comments: One commenter questioned the statutory basis for denying a borrower who has been convicted of, or has pled nolo contendere or guilty to, a crime involving fraud in obtaining the Perkins Loan the opportunity to rehabilitate the defaulted Perkins Loan. The commenter questioned the statutory basis for denying loan rehabilitation to such borrowers. The commenter also contended that institutions have no reasonable way of knowing whether a borrower has been convicted of, or has pled nolo contendere or guilty to, a crime involving fraud in obtaining a Perkins Loan.

Discussion: Section 8021(a) of the HERA provides that a student who has been convicted of, or has pled nolo contendere or guilty to a crime involving fraud in obtaining Title IV, HEA program assistance is not eligible for additional Title IV assistance unless he or she has repaid the fraudulently obtained Title IV aid. If a borrower were permitted to rehabilitate a fraudulently obtained Perkins Loan under Sec. 674.39 of the Perkins Loan program regulations, the borrower would regain eligibility for additional Title IV, HEA program assistance without having repaid the fraudulently obtained loan in full, as required by the HERA. We do not agree with the commenter's contention that an institution will not know if a borrower was found guilty of fraud. The institution would almost certainly be involved in any legal proceedings relating to a Perkins Loan that was fraudulently obtained from that institution.

Changes: None.

Definition of Satisfactory Repayment Arrangement (Sec. Sec. 682.200 and 685.102)

Comments: Several commenters pointed out that the standard for an on-time payment for purposes of rehabilitating a loan is now different from the standard for an on-time payment for purposes of making satisfactory repayment arrangements on a defaulted loan to regain Title IV, HEA program assistance eligibility. Under the rehabilitation rules, an on-time payment is a payment made within 20 days of the due date. Under the satisfactory repayment arrangement rules, an on-time payment is a payment made within 15 days of the due date. Since some borrowers make satisfactory repayment arrangements and attempt loan rehabilitation concurrently, the commenters recommended using within 20 days of the due date as the on-time standard for both purposes.

Discussion: The making of six consecutive monthly payments under satisfactory repayment arrangements restores Title IV, HEA program assistance eligibility to a defaulted borrower. We believe that the standard for on-time payments for purposes of regaining eligibility for Title IV, HEA program assistance should be stricter than the standard for rehabilitation of a defaulted loan. In addition, the on-time payment standard for borrowers who are in a regular repayment status requires that the payments be made within 15 days of the due date. We do not believe that it is appropriate to provide a longer period for on-time payments for borrowers who are in default on their loans than for borrowers who are current on their loans. Borrowers in default should be held to an on-time standard that is at least as strict as the standard applied to current borrowers, not rewarded with extra time to make a payment. Finally, we note that Congress did not apply the 20-day standard adopted for the loan rehabilitation program to borrowers in other situations.

Changes: None.

Eligible Borrower (Sec. Sec. 682.201 and 685.200)

Comments: Two commenters recommended adding language to Sec. 682.201 and 685.200 to provide that a student borrower is not eligible for Title IV, HEA program assistance unless the borrower has repaid any Title IV, HEA program assistance obtained by fraud, if the student has been convicted of, or has pled nolo contendere or guilty to, a crime involving fraud in obtaining Title IV, HEA program assistance. These commenters also recommended that we revise Sec. 682.201 to list the general eligibility requirements for all borrowers, and then the requirements that are specific to each loan type. The commenters felt that this approach would be more efficient and eliminate unnecessary redundancies.

Discussion: The interim final regulations in Sec. Sec. 668.32(m) and 668.35(i) include the new eligibility provision that prohibits a student borrower from obtaining Title IV, HEA program assistance unless the borrower has repaid any Title IV, HEA program assistance obtained by fraud. Section 682.201(a) and (b) of the FFEL regulations stipulate that a Stafford Loan borrower and a student PLUS borrower, respectively, must meet the eligibility requirements in 34 CFR part 668 to qualify for a Stafford Loan. Similar references to the eligibility requirements in 34 CFR part 668 are in Sec. 685.200(a)(1)(ii) and 685.200(b)(1)(ii) of the Direct Loan regulations. We believe that it would be redundant to include the language regarding the student eligibility requirements already outlined in part 668 in Sec. 682.201 and 685.200. We disagree with the suggestion that restructuring Sec. 682.201 would be more efficient. In developing the interim final regulations, we determined that the most efficient and easily understandable way to incorporate the changes mandated by the HERA into Sec. 682.201 was to fit the changes into the existing structure of this section. We believe that it is easier to identify changes that we have made to a section if the overall structure of the section remains consistent with past versions of that section. Although some redundancy is unavoidable with this approach, we have reduced the redundancies through the use of cross-references.

Changes: None.

Comments: Several commenters noted that a student borrower may receive a Federal Direct Subsidized Stafford/Ford Loan or a Federal Direct Unsubsidized Stafford/Ford Loan and a FFEL Program Student PLUS Loan for the same period of enrollment. These commenters recommended revising the PLUS loan student eligibility requirements in both the FFEL and Direct Loan programs, to stipulate that a graduate or professional student's annual loan maximum eligibility for either a FFEL Stafford Loan or a Direct Stafford/Ford Loan, as applicable, must be determined before awarding the student a PLUS Loan.

Discussion: The Secretary has previously issued guidance stating that a graduate or professional student's maximum annual Stafford Loan eligibility must be determined before the student applies for a PLUS Loan, although the student is not first required to borrower up to his or her maximum annual Stafford Loan limit before receiving a PLUS Loan. If a school participates in both the FFEL and Direct Loan programs, the school must determine the borrower's maximum annual Stafford Loan eligibility under the program the school is participating in for Stafford Loan purposes. We agree that this guidance should be incorporated in the regulations.

Changes: We have revised Sec. Sec. 682.201(b)(3) and 685.200(b)(1)(iv) to specify that a graduate or professional student's maximum annual Stafford Loan eligibility under either the Direct Loan or FFEL program must be determined before the student applies for a PLUS Loan.

Comments: Two commenters recommended that Sec. 682.201(d)(1) be revised to stipulate that a borrower who obtained a loan by identity theft or some other illegitimate means, or who obtained a loan for which he or she was ineligible, may not consolidate that loan. In addition, these commenters recommended that these borrowers not be permitted to consolidate loans for which the borrower is eligible until the loans for which the borrower was ineligible have been paid in full. Several commenters noted that new Sec. 682.201(d)(2) states that a borrower may not consolidate a loan for which the borrower is wholly or partially responsible. Because our revision stipulating that a borrower who obtained a loan by identity theft or some other illegitimate means, or who obtained a loan for which he or she was ineligible, may not consolidate that loan was unclear, several commenters asked if the word ``not'' was inadvertently dropped from this section.

Discussion: Section 682.201(d)(2) of the interim final regulations should have read, ``A borrower may not consolidate a loan under this section for which the borrower is wholly or partially ineligible.'' This language mirrors the existing provisions in Sec. 685.211(e)(4) of the Direct Loan regulations. The revised Sec. 682.201(d)(2) precludes a borrower who obtained a Title IV loan by identity theft, fraud, or some other illegitimate means from consolidating the ineligible loan. However, we do not believe that the HERA prohibits a borrower who has obtained loans for which the borrower is ineligible from consolidating loans for which the borrower is eligible, and we do not believe we have the authority to impose such a restriction by regulation. We believe the revision to Sec. 682.201(d)(2) adequately addresses commenters' concerns and that revising Sec. 682.201(d)(1) is unnecessary.

Changes: We have replaced ``responsible'' with ``ineligible'' in Sec. 682.201(d)(2).

Eligibility for a Direct Consolidation Loan (Sec. Sec. 682.201, 685.100 and 685.220)

Comments: Two commenters recommended that we amend the FFEL and Direct Loan program regulations to clarify that, in the case of a borrower who wishes to consolidate a Federal Consolidation Loan that has been submitted for default aversion into the Direct Loan Program, the borrower must be delinquent or in default on the Federal Consolidation Loan at the time the borrower applies for the Direct Consolidation Loan. The commenters believed that the current regulatory language would allow a borrower to consolidate a Federal Consolidation Loan on which the borrower is current on making payments into a Direct Consolidation Loan, if the Federal Consolidation Loan had been submitted for default aversion at some time in the past.

Discussion: We agree that Federal Consolidation Loans that are currently delinquent or in default may be consolidated into a Direct Consolidation Loan. However, we do not believe that it is necessary to amend the current regulatory language in Sec. Sec. 682.201, 685.100 and 685.220 to state this requirement more explicitly.

Changes: None.

Comments: Several commenters urged the Secretary to clarify that borrowers with defaulted Federal Consolidation Loans are eligible to consolidate into the Direct Loan Program, without including another eligible loan, for the purpose of obtaining an income contingent repayment (ICR) plan. Section 428C(a)(3)(B)(i)(IV) of the HEA provides this option for borrowers with delinquent Federal Consolidation Loans that have been submitted to the guaranty agency for default aversion. The commenters believed that thisprovision of the law, which was added by the HERA, was intended to provide the ICR option to borrowers who are either seriously delinquent or in default on their Federal Consolidation Loans. They also noted that the statutory language does not distinguish between non-defaulted and defaulted borrowers, and that any default claim filing would have been preceded by a default aversion submission.

Discussion: The commenters are correct in reading the regulations implementing the changes made to section 428C(a)(3)(B)(i)(IV) of the HEA to allow a borrower to consolidate a single defaulted Federal Consolidation Loan into the Direct Loan Program for the purpose of obtaining an ICR plan. We believe that the regulatory language is sufficiently clear and that it is not necessary to revise the regulations to state this more explicitly. An otherwise eligible borrower may also consolidate a single Federal Consolidation Loan into the Direct Loan Program for the purpose of obtaining an income contingent repayment plan if the borrower has filed an adversary complaint in a bankruptcy proceeding seeking to have the Federal Consolidation Loan discharged, regardless of whether that Federal Consolidation Loan is current, delinquent, or in default. A borrower who is seeking to have a Federal Consolidation Loan discharged in bankruptcy should be treated the same as a borrower whose loan has been submitted for default aversion. A borrower who seeks to have a loan discharged in bankruptcy is clearly stating his or her intent not to repay the loan, but the bankruptcy filing precludes the submission of a default aversion request. Offering the Direct Loan Program ICR option to such a borrower provides an alternative to having the loan discharged in bankruptcy.

Changes: None.

Permissible Charges by Lenders to Borrowers (Sec. 682.202(a))

Commments: One commenter urged the Department to develop and publish regulations to restrict a lender's ability to charge an FFEL Program borrower an interest rate that is less than the rate specified in the HEA and the program regulations. The commenter believes that the regulations should require lenders to charge all borrowers the same rate to stop lenders from using interest rates to discriminate between institutions and borrowers based on inequitable criteria or to eliminate competition in the student lending market.

Discussion: Section 427A(l) of the HEA provides that nothing shall prohibit a lender from charging a borrower an interest rate less than the rate specified in the statute. Accordingly, we do not have the statutory authority to require lenders to charge all borrowers the same interest rate.

Changes: None.

Insurance Premium and Federal Default Fees (Sec. Sec. 682.202(d)(2) and 682.401(b)(10))

Comments: One commenter stated that the changes made to Sec. 682.202(d)(2) and 682.401(b)(10) in the interim final regulations appear to eliminate the authority of a lender or guaranty agency, under Sec. 682.209(f)(4), to charge a guarantee fee to a borrower who is refinancing a fixed rate PLUS Loan or a Supplemental Loans for Students (SLS) Loan made prior to July 1, 1987 under Sec. 682.209(f)(1). The commenter believes that the HERA provisions that changed the optional insurance premium to a mandatory Federal default fee did not remove a lender's or guaranty agency's authority to charge a guarantee fee in these cases.

Discussion: We agree that the HERA did not remove a lender's or guaranty agency's authority to charge a guarantee fee if a borrower refinances a fixed rate PLUS or SLS loan made prior to July 1, 1987. However, we believe the existing language in Sec. 682.209(f)(4), which specifically states that the refinancing lender may charge the borrower a guarantee fee in these circumstances, already addresses this issue.

Changes: None.

Loan Disbursement Through an Escrow Agent (Sec. Sec. 682.207(b)(1)(iv) and 682.408(c))

Comments: Many commenters noted that the discussion in the preamble of the interim final regulations related to the new 10-day deadline for a lender to pay funds to an escrow agent for disbursement to a school differed from the regulatory language and requested clarification. The commenters indicated that the preamble stated that the transfer of loan funds must take place no earlier than 10 days prior to disbursement to the borrower, while the regulations indicated that the 10 days referred to the transfer of the loan funds to the school prior to the school's delivery of the funds to the borrower. A couple of commenters indicated that an additional change was needed to Sec. 682.408(c)(2) to reflect the reduction from 21 to 10 days for disbursement through an escrow agent. Several commenters also recommended that Sec. 682.408(c) be revised to provide that an escrow agent, as the lender's agent, could disburse loan funds directly to a borrower in a study-abroad program at the borrower's request.

Discussion: We agree with the commenters that there is a difference between the discussions of the 10-day period in the preamble and in the interim final regulations. The language in the interim final regulations that states that the escrow agent shall transmit loan proceeds received from a lender to a school not later than 10 days after the agent receives the funds from the lender accurately reflects our policy on this issue. A revision to Sec. 682.408(c)(2) reflecting the reduction from 21 to 10 days for disbursement through an escrow agent is unnecessary. Paragraph (c)(2) of Sec. 682.408 was incorporated into new Sec. 682.408(c) in the interim final regulations and the reduction from 21 to 10 days for disbursement through an escrow agent is reflected in this new paragraph. We agree with the commenters who recommended that Sec. 682.408(c) be revised to provide that an escrow agent, as the lender's agent, could disburse loan funds directly to a borrower in a study-abroad program at the borrower's request.

Changes: We have amended Sec. 682.408(c) to clarify that an escrow agent may disburse Stafford Loan proceeds directly to a borrower who is attending a study-abroad program and who requests a direct disbursement from the lender.

Due Diligence in Disbursing a Loan (Sec. Sec. 682.207 and 682.604)

Comments: Several commenters disagreed with our determination that PLUS Loan funds cannot be disbursed directly to a borrower enrolled in a study-abroad program or at a foreign school. The commenters believed that the ``same terms and conditions'' provision in section 428B(a)(2) of the HEA permits retention of the prior policy allowing direct disbursement of PLUS Loan funds. The commenters noted that, while the PLUS funds check must still be made co-payable to the institution and the borrower under 428B(c)(2) of the HEA, disbursing funds directly to a borrower to be endorsed and mailed to an institution may assist borrowers in paying for expenses while traveling to a foreign school.

Discussion: Section 428B(a)(2) of the HEA does not authorize the Secretary to establish disbursement rules for PLUS Loans made to pay for attendance at foreign institutions or for students enrolled in study-abroad programs that are different from the rules for other FFEL Loans for attendance at those institutions.

Changes: None.

Comments: One commenter suggested that the regulations in Sec. 682.207(b)(1)(v)(C)(1) be revised to clarify that a lender or guaranty agency must verify a student's enrollment with the home institution, rather than with the foreign school, before making a direct disbursement to a student in a study-abroad program.

Discussion: The Secretary agrees with the commenters.

Changes: Section 682.207(b)(1)(v)(C)(1) has been revised to clarify that a lender or guaranty agency may make a disbursement directly to a student enrolled in a study-abroad program only after verification of the student's enrollment with the home institution.

Comments: One commenter did not agree that a lender or guaranty agency should be required to verify that a continuing student is still enrolled at the enrollment status for which the loan was certified before making a disbursement of Stafford Loan funds directly to a student at a foreign school. The commenter noted that, although the preamble stated that the verification requirements in the regulations are based on those in Dear Colleague Letter (DCL) G-03-348, this requirement differs from that in the DCL, which simply required verification that the student was accepted for enrollment at the foreign school. The commenter felt that the institution should be responsible for notifying the lender if the borrower's enrollment status changed to less than half-time.

A couple of commenters did not believe that the regulations should limit how a lender or guaranty agency may contact a foreign school or home institution to verify enrollment. The commenters felt that other forms of contact, in addition to contact by telephone or e-mail, such as facsimile, should be acceptable. One commenter was concerned that the regulations do not specify who at a foreign school may authorize a disbursement to be sent directly to a borrower. The commenter felt that this gap left the process open to abuse.

Discussion: The intent of the statutory requirement is to require a confirmation that a student who is attending or plans to attend a foreign school is actually eligible to receive FFEL funds when those funds will not be sent to the school, but will be disbursed irectly to a student. Therefore, we believe it is appropriate to require a lender or guaranty agency to confirm that a continuing student's enrollment (at least half-time) supports eligibility for the loan disbursement. As the commenter noted, a change in enrollment status would affect a student's eligibility for a loan only if the student has dropped below half-time enrollment. Therefore, the lender or guaranty agency need only confirm that the student is still enrolled at least half-time. Because of concerns with timeliness and security, the Secretary does not believe that all forms of contact are appropriate for the verification of enrollment. However, the Secretary does agree that contact by facsimile is acceptable.

The Secretary agrees that not just any individual at a foreign school should be permitted to authorize a disbursement directly to a student. In DCL GEN-06-11, the Department asked foreign schools to use the modified institutional eligibility electronic application (EAPP) to enter the names of the individuals who are authorized by the school to certify FFEL Loan applications. The DCL noted that the Department expects guaranty agencies or lenders to contact these individuals, whose names will be accessible in the Department's Postsecondary Education Participants Systems (PEPS), to verify enrollment. To the extent that a foreign school notifies a guaranty agency or lender of other individuals who are authorized to provide this information, the guaranty agency or lender must verify the information with at least one of the persons entered by the school on the EAPP that those officials are authorized to act on behalf of the institution in administering the FFEL Program. To allow the Secretary the flexibility to change this process in response to possible systems changes, the Secretary does not believe that the procedures for this contact should be specified in the regulations. However, the Secretary has decided that the regulations should require guaranty agencies and lenders to contact foreign schools in accordance with any procedures specified by the Department.

Changes: Section 682.207(b)(2)(i) has been revised to permit a lender or guaranty agency to contact a foreign school via facsimile to verify a student's enrollment. In addition, Sec. 682.207(b)(2)(i)(A) has been changed to require guaranty agencies and lenders to contact foreign schools in accordance with any procedures specified by the Secretary.

Parental Leave and Working Mother Deferments (Sec. Sec. 682.210(o) and (r) and 685.204(d)(2))

Comments: Many commenters asked whether the deletion of section 428(b)(7)(A)(ii) from the HEA by the HERA effectively eliminated the parental leave and working mother deferments for borrowers with loans disbursed before July 1, 1993. The commenters are concerned that these deferments will not be available to an otherwise eligible borrower because the borrower must waive up to one month of the borrower's grace period in order to meet the eligibility criteria for the deferment.Discussion: The requirement that a borrower waive at least one month of the grace period so the borrower may be certified as having been enrolled at least half time within the six-month period preceding the deferment start date in Sec. 682.210(o) applies only to the parental leave deferment. Deferments are a term and condition of the borrower's promissory note. The Congress, in making changes to the HEA historically, has not eliminated deferments already granted to a borrower as a term and condition of the borrower's loan, and it does not appear that Congress intended to do so in this case. Accordingly, otherwise eligible borrowers may continue to waive a month of the grace period, if necessary, in order to qualify for the parental leave deferment.

Changes: None.

Forbearance (Sec. 682.211)

Comments: Several commenters suggested that we eliminate Sec. 682.211(h)(3) of the FFEL regulations because section 8014(e) of the HERA amended the HEA to remove the requirement that the terms of a mandatory forbearance be in writing.

Discussion: While we agree that the HERA eliminated the requirement that the terms of a mandatory forbearance agreement be in writing, we also note that the HERA requires that the terms of a mandatory forbearance agreed to by the lender and the borrower or endorser be documented by a confirmation notice sent by the lender to the borrower/endorser and by the lender recording the terms in the borrower's file. We believe that, with the exception of administrative forbearances in Sec. 682.211(f), the same procedures should apply to all the forbearances. The interim final regulations amended Sec. 682.211(b)(1) to reflect the new forbearance requirements. We believe that Sec. 682.211(h)(3) should also be changed to reflect the new requirements that the lender send a notice to the borrower/endorser and include a notation in the borrower's file confirming the forbearance rather than simply eliminating the requirement for a written forbearance agreement.

Changes: We have amended Sec. 682.211(h)(3) to reflect these changes.

Teacher Loan Forgiveness (Sec. Sec. 682.215(c) and 685.217(c))

Comments: One commenter noted that the use of the word ``either'' with regard to a borrower qualifying for teacher loan forgiveness based on teaching special education in ``either an eligible elementary or secondary school'' could be misinterpreted. The commenter recommended removing the word ``either'' to make it clear that a borrower could combine teaching service in an eligible elementary school and an eligible secondary school to qualify for teacher loan forgiveness as a highly qualified special education teacher.

Discussion: Use of the word ``either'' was not intended to imply that service as a highly qualified special education teacher in an eligible elementary school and service as a highly qualified special education teacher in an eligible secondary school could not be combined to qualify a borrower for teacher loan forgiveness.

Changes: We have removed the word ``either'' from Sec.682.215(c)(3)(ii)(B), 682.215(c)(4)(ii)(B), 685.217(c)(3)(ii)(B), and 685.217(c)(4)(ii)(B).

Payment of Special Allowance on FFEL Loans (Sec. 682.302)

Comments: One commenter asked us to clarify the effective date for the change made by the HERA to the calculation of special allowance payments for PLUS Loans.

Discussion: As reflected in the interim final regulations, PLUS Loans made after January 1, 2000 are no longer subject to the minimum 9 percent trigger for special allowance payments. In accordance with the effective date for the provision of the HERA that made this change, lenders will be paid special allowance on these loans for activity beginning April 1, 2006, which will be reflected on billing reports submitted to the Department after June 30, 2006.

Changes: None.

Comments: Some commenters, particularly from the FFEL industry, claimed that the regulations are impermissibly retroactive. In particular, these commenters claimed that the interim final regulations improperly applied the statutory changes made by the Taxpayer-Teacher Protection Act of 2004 (TTPA), and the HERA, to periods before those statutes became effective. The commenters pointed to the explanation of certain terms in Sec. 682.302(f) as an example of the changes that they felt were being improperly applied retroactively.

Discussion: The changes made to Sec. 682.302 are not retroactive. Prior to the publication of the August 9 interim final regulations, the regulatory provisions in Sec. 682.302 had not been updated since 1994, except for a change to reflect the 1993 statutory amendment that eliminated the 9.5 percent minimum special allowance payment (SAP) rate on loans acquired with funds from a tax-exempt obligation originally issued on or after October 1, 1993. Thus, the prior regulations did not reflect guidance issued by the Department since 1993 to interpret the HEA and the regulations (DCL L-93-161 (November 1993), L-93-163 (December 1993), and L-96-186 (March 1996), FP-05-01 and FP-06-01) or the changes made to those requirements by the TTPA or HERA. The regulations must reflect the rules for the special allowance eligibility of both loans for which SAP at the 9.5 percent minimum rate is now claimed and loans on which this rate may be claimed in the future. The TTPA placed significant restrictions on the eligibility of new loans for the 9.5 percent SAP, and the HERA significantly restricted whether additional loans could acquire eligibility. However, the eligibility of the great majority of loans on which a 9.5 percent SAP is now and will be claimed depends on, or may be affected by, transactions such as various refinancing transactions that occurred prior to the effective date of either the TTPA or HERA. The prior regulations did not state the consequences of some of those transactions, even though those consequences had been well settled, under the Department's interpretations of the law in effect when the transactions occurred. To clarify the requirements for 9.5 percent SAP eligibility, the interim final regulations first incorporate these interpretations, and then address changes made by the TTPA to the continued eligibility of these loans for 9.5 percent SAP, and by the HERA as to whether loans may acquire that eligibility.The interim final regulations include in Sec. 682.302(f) an explanation of certain terms (refinance and originally issued) that reflects Departmental interpretations and usage of those terms historically. Based on that usage, it is reasonable to conclude that the terms are already generally understood as explained in the regulations.

The interim final regulations, as published on August 9, 2006, do no more than provide loan holders (and other interested parties) an orderly statement of the requirements for acquiring and continued eligibility for 9.5 percent SAP for all cohorts of loans, both as in effect before the 2004 and 2006 amendments to the HEA, and under the 2004 and 2006 amendments to the HEA. The interim final regulations did not create or change the terms, conditions, and requirements for the eligibility for the 9.5 percent SAP from those which already existed under applicable law. To the extent that loan holders were in compliance with the requirements of: (1) The then-current regulations; (2) applicable prior Department interpretations of those regulations and the HEA; and (3) changes made by the TTPA and by the HERA, the billing status of loans was not changed with the publication of the
interim final regulations.

Changes: None.

Comment: Several commenters claimed that Sec. 682.302(e)(2) and (3) improperly requires that a loan acquired with pre-October 1, 1993 tax-exempt funding be ``financed continuously'' by tax-exempt financing to retain eligibility for SAP at the 9.5 percent minimum rate. Some believed that the interpretations on which the Department relied in adopting the interim final regulations had not been communicated to the public, or that the regulations went beyond merely updating existing regulations to reflect longstanding policy. Another commenter questioned whether the ``debt'' to which Sec. 682.302(e)(2)(i)(B) refers to as having been ``refinanced'' is a student loan or a bond.

Discussion: The term ``financed continuously'', to which the comments refer, appears only in Sec. 682.302(e)(2). Section 682.302(e)(2) describes the special allowance rate applicable to any loan acquired with funds from a source that makes the loan eligible for a SAP at the 9.5 percent minimum rate that has been refinanced. All loans that are initially eligible for a 9.5 percent SAP and have been refinanced can be divided into two mutually exclusive groups. The first group includes only those loans that have been refinanced exclusively and continuously from tax-exempt sources. The second group includes all loans not in the first group. The phrase ``financed continuously'' is used to describe the first group, not to exclude the second group from potential eligibility for SAP at the 9.5 percent minimum rate. The interim final regulations contained no provisions that limit continued eligibility for SAP at the 9.5 percent minimum rate only to loans in the first group--those loans continuously refinanced from tax-exempt sources. Some loans in the second group also retain that eligibility after refinancing. The regulations add no condition on 9.5 percent SAP eligibility that was not already contained in the statute or regulations.

The regulations accurately reflect Department interpretations of applicable law that establish which SAP rate applied to loans refinanced using tax-exempt sources. The Department has had numerous discussions with program participants who have cited these interpretations and it is clear that the loan industry has been aware of the Department's interpretation of these terms. The regulations in Sec. 682.302(e)(2)(i)(A) and (B) describe the first group of refinanced loans--those continuously refinanced using tax-exempt sources--and state that such loans qualify for a SAP at the 9.5 percent minimum return rate.

These regulations rest squarely on the Department's interpretation of the HEA as articulated in previous guidance issued in DCL 93-L-161 (November 1993), p. 13; Dear Colleague Letter 93-L-163 (December 1993), p. 2. Under the Department's interpretation of the regulations included in the DCLs, loans that were eligible for the 9.5 percent SAP rate prior to a tax-exempt refinancing remained eligible after that refinancing. Because refinancing from tax-exempt sources does not alter eligibility of the loan for the 9.5 percent SAP rate, there is no need to distinguish between loans involved in a single tax-exempt refinancing and those involved in a series of tax-exempt refinancings. The regulations therefore include in this first group all loans that have been associated only with a tax-exempt refinancing, without regard to the number of those refinancings. The phrase ``financed continuously by tax-exempt obligations,'' in Sec. 682.302(e)(2)(i)(B)(2) simply describes loans associated exclusively with tax-exempt refinancing.The regulations do not exclude from eligibility for the 9.5 percent SAP loans affected by other refinancings. The Department's regulations
in Sec. 682.302(e)(2)(ii) describe loans refinanced from sources other than qualified tax-exempt sources. This second group consists of two subgroups, which are distinguished by the treatment of the tax-exempt obligation affected by the refinancing. If the prior tax-exempt obligation is retired or deceased, SAP is payable at the taxable rate.

This rule has been in effect since 1985. If the prior tax-exempt obligation has not been retired or defeased, SAP remains payable at the 9.5 percent minimum return rate as discussed in DCL 96-L-186 (March 1996). The regulations use the words ``a loan is refinanced'' to describe the refinancing of an individual student loan. The term ``refinance'' is commonly used as well to refer to the refunding of an outstanding bond or other financial obligation. The regulations in Sec. 682.302(e)(2)(i) use the phrase to refer to a bond or other instrument issued to refund an existing bond or other obligation of the issuer.

Changes: Section 682.302(e)(2) as revised in the interim final regulations effectively explains the applicability of the SAP rates and so it is not necessary for us to retain paragraph (c)(5) of Sec. 682.302. Therefore, subparagraph (c)(5) is removed.

Comments: One commenter objected to the explanation in Sec. 682.302(f)(2) that a bond is considered to be ``originally issued'' when issued to obtain funds to make or acquire loans in which the Authority did not have an interest. This explanation, the commenter noted, would exclude a tax-exempt obligation issued to refund an existing taxable bond or to refinance loans already held by the Authority. The provision would thus disqualify from eligibility for the 9.5 percent SAP loans acquired with proceeds of those obligations, even if they had been issued prior to October 1, 1993.

Discussion: The provision addressing the phrase ``originally issued'' is used to explain how the October 1, 1993, deadline affects at least four different types of tax-exempt obligations: (a) Obligations used to obtain funds to make loans or acquire loans from third parties; (b) obligations that refund a pre-October 1, 1993, qualifying obligation or are part of a series of such refunding issues; (c) obligations used to refund a taxable obligation of the issuer; and (d) obligations used to obtain funds to acquire loans that the Authority made or purchased using funds from either a taxable obligation or a tax-exempt obligation issued on or after October 1, 1993, but not to refund that obligation. The language in Sec. 682.302(f)(2) to which the commenter objects clearly applies to the ``new money'' issues, described in paragraph (a) above. However, we agree with the commenter that the language could be read to exclude from tax-exempt special allowance treatment loans acquired with funds from tax-exempt obligations described in paragraphs (c) and (d), even if the tax-exempt bond had been issued before October 1, 1993. That result would be contrary to the position taken in the 1985 regulations and contrary to our intent in using this particular language.\1\ We also believe that the language should be revised to make it clear that a tax-exempt refunding, or series of such refundings, of a tax-exempt obligation does not change the SAP status of loans made or purchased with funds obtained from the first such tax-exempt obligation so refunded, as described in paragraph (b).
---------------------------------------------------------------------------

\1\ The term purchase includes acquisition of an interest in a loan by means of a pledge of the loan, and the 1985 regulations implicitly interpret the term purchase as used in section 438 of the HEA to include acquisition of a loan by pledge, not merely acquisition from another party.
---------------------------------------------------------------------------

Changes: The interim final regulations were intended to state, and not change, existing law. Accordingly, we have revised Sec. 682.302 to state, in new paragraph (f)(2)(i), that an obligation the proceeds of which are used to make or purchase loans, including by pledge as collateral for that obligation, is considered to be originally issued on the date it is issued. The limitation that loans are considered purchased only if the Authority has neither an existing legal or equitable interest in the loan is removed. Second, the regulation is revised to add a new paragraph (f)(2)(ii) to address specifically a tax-exempt obligation that refunds, initially or in a series of such refundings, a tax-exempt obligation the proceeds of which were used to make or purchase loans (one described in paragraph (f)(2)(i)). Such a tax-exempt refunding obligation is considered to be originally issued on the date on which the initial tax-exempt obligation, described in paragraph (f)(2)(i), was issued.

Basic Program Agreement (Sec. 682.401)

Comments: One commenter requested that we revise Sec. 682.401(b)(10)(iii) to clarify that a lender is required to charge an insurance premium or Federal default fee.Discussion: Sections 682.401(b)(10)(i)(A) and (B) clearly states, with the exception of a Consolidation Loan or SLS or PLUS Loan refinanced under Sec. 682.209(e) or (f), the requirements on the collection of insurance premiums and Federal default fees by a guaranty agency. Further clarification is unnecessary.

Changes: None.

Comments: Several commenters requested that a change be made to Sec. 682.401(b)(14) to reflect the payment to lenders of exempt, lender-of-last-resort, and other claims that may be paid at 100 percent insurance.

Discussion: This section of the FFEL regulations outlines the basic program agreement between the guaranty agency and the Secretary. Specifically, Sec. 682.401(b)(14) outlines the guarantee liability of the agency, which relates primarily to the payment of default claims. Although other kinds of claims may be paid on a loan, we do not believe that it would be appropriate to include these other claim types, none of which can be reasonably anticipated at the time of guarantee, in Sec. 682.401(b)(14).

Changes: None.

Comments: Several commenters stated that the HERA revised section 428(c)(2) of the HEA to require guarantors to establish procedures to ensure that Consolidation Loans are not an excessive proportion of the guaranty agency's recoveries on defaulted loans, but objected to the inclusion in Sec. 682.401(b)(29) of the requirement that guarantors submit these procedures to the Secretary for approval.

Discussion: We believe that if a guarantor is required by law to establish procedures to ensure that Consolidation Loans are not an excessive portion of the agency's recoveries on defaulted loans, then the Secretary has a fiscal responsibility to review and approve such procedures. The requirement to submit these procedures to the Secretary for approval is also authorized by Sec. 682.401(d)(2).

Changes: None.

Identity Theft (Sec. Sec. 682.402 and 685.215)

Comments: Many commenters expressed concern regarding the provisions of the interim final regulations that implement the HERA provisions relating to the discharge of an FFEL or Direct Loan that was falsely certified as the result of the crime of identity theft. Several commenters felt that a definition of identity theft based on the adjudication of a crime is too narrow and burdensome and that we should adopt the definition of identity theft used in the Fair Credit Reporting Act (FCRA) and by the Federal Trade Commission (FTC).Many commenters felt that tying a discharge of an FFEL or Direct Loan to a determination by a Federal, State or local court that the crime of identity theft had occurred, and requiring documentation of that fact, was unduly restrictive. The commenters believed that requiring victims whose cases are actually prosecuted to await the outcome of a judicial process for relief fails to provide discharges and reimbursements in a timely fashion and fails to offer victims of identity theft proper relief. Several commenters asked for clarification on how a loan would be discharged under the common law defense of forgery if a law enforcement agency does not pursue a perpetrator of identity theft. Finally, the commenters requested that we immediately adopt an explicit, reliable process that provides sufficient protection to bona fide victims of identity theft and that we also track cases of unresolved identity thefts within the Department.

Several commenters did not agree with the requirement that a lender and guarantor demand payment on a discharged loan from the perpetrator and pursue collection action if payment in full is not received. These commenters urged the Department to allow guarantors either to subrogate loans discharged based on identity theft to the Department or refer the loans to the appropriate enforcement agencies for action. Several commenters stated that the provisions related to identity theft would be better placed in a discrete section of the regulations. They believe this approach would facilitate processing and reporting, and ensure that lenders, guarantors, and other program participants have access to comprehensive regulations in a single, identifiable section. Several commenters noted inconsistencies between the regulations and the preamble with respect to identity theft. These commenters state that the preamble erroneously suggested that the new regulations provide for reimbursement to the loan holder only when perpetrator is affiliated with the school. The commenters requested that preamble to the final regulations accurately describe the identity theft provisions in this regard.

Discussion: The HERA amended the HEA to authorize a discharge of a FFEL or Direct Loan Program loan if the borrower's eligibility was falsely certified because the borrower was a victim of the ``crime'' of identity theft. The HERA specifically provides for a loan discharge only when a ``crime'' of identity theft has occurred. For this reason, the interim final regulations provide relief only to the victim of a proven crime of identity theft. The purpose of the Fair and Accurate Credit Transactions Act (FACT) (which amended the FCRA) and similar legislation and the FTC rules is to enable individuals who believe that their identifying information has been misappropriated to alert parties who might extend credit to the thief based on that stolen identity information. The purpose of the identity theft provision in the HEA is different--to relieve borrowers and lenders from liability on loans that result from proven misuse of that information. Thus, the FACT Act requires credit reporting agencies to post ``fraud alerts'' on an individual's credit record to deter lenders from extending credit to a thief who uses the stolen identity information, and to block the reporting of any information on the record that the individual identifies as resulting from that identity theft. 16 U.S.C. Sec. Sec. 1681c-1, 1681c-2. There is little, if any, substantive difference between the FACT Act definition of ``identity theft'' in 16 U.S.C. Sec. 1681a(q)(3) and the descriptive definition used in the interim final regulations. Therefore, there is no reason to use the specific FACT Act definition. The commenters' claim that the regulations are unduly restrictive is contrary to American common law. As indicated in the preamble to the interim final regulations, under generally applicable laws, individuals who do not apply for loans, execute promissory notes for loans or knowingly accept the benefits of loan disbursements are not liable to repay those loans, even if their names were forged on the loan instrument. An individual who claims that his or her signature was forged is not required to delay asserting that claim until a criminal prosecution occurs and nothing in the Department's regulations require such a delay. An individual who claims that his or her signature was forged can assert that claim to oppose liability on a loan and the holder of the loan must evaluate and accept or reject that claim whether or not a criminal prosecution occurs.

The regulations require the guaranty agency, not the lender, to demand payment from the perpetrator of the identity theft. Guaranty agencies must ordinarily use due diligence to collect FFEL Program loans and the perpetrator is liable for such a debt. In some instances, the Department may choose to take assignment of the debt. However, the regulations do not require a guaranty agency to take unusual or extraordinary steps to collect this debt. The comment that the regulations regarding identity theft discharge relief should be placed in a separate section does not explain why such treatment would improve clarity of the procedure. The provisions added in the interim final regulations implement a specific discharge provision added by the HERA to the other discharge relief available under section 437(c) of the HEA. The regulations are not intended to provide general guidance on handling claims that loan applications or promissory notes have been forged where the claim does not rest on a proven crime. Because each provision for discharge relief under section 437(c) of the HEA offers relief to borrowers or purported borrowers by payment to the holder of the loan, it is logical to include procedures for handling claims under the new discharge provision among the existing procedures for claims for other kinds of discharge relief.

The comment suggesting that the Department adopt a process for tracking what it refers to as unresolved identity thefts does not appear to be practicable at this time. To the extent that this proposal is meant to deter lenders from extending new credit based on new false applications using the same individual's identity, the proposal duplicates the procedure already required under the FACT Act. Lenders must obtain a credit report in order to qualify an applicant for a PLUS Loan, and therefore, the alert option available under the FACT Act can be expected to provide effective prospective relief with respect to applications for PLUS Loans. Implementation of a system that would prospectively protect alleged victims of identity theft from misuse under all the student loan
programs requires participation and input from many participants in the loan programs. Such a process may be both costly and complicated. The Department is open to considering practical proposals in the future.Finally, the commenter is correct that there are inconsistencies between the preamble to the interim final regulations and the interim final regulations, themselves, regarding reimbursement to the loan holder when the perpetrator of identity theft is affiliated with a school. As noted in the preamble to the interim final regulations, Sec. 682.402(e)(1)(i)(B) of the false certification discharge provisions has, since 1994, made discharge relief, with the accompanying reimbursement to the lender, available in instances in which an individual's signature was forged on a promissory note or loan application by the school. If the forgery is not committed by someone affiliated with a school, the purported borrower would not ordinarily be legally liable for the loan. However because the loan is not legally enforceable against the borrower, the loan does not qualify for any FFEL payments from the Department. The new identity theft provision in Sec. 682.402(e)(1)(i)(C) allows the lender to be reimbursed when the loan was made by reason of a crime of the theft of the identity of the purported borrower, without regard to whether the thief was affiliated with a school. The final regulations bar payment to the lender if the theft was committed by the lender or an agent of the lender. The preamble to the interim final regulations accurately stated these elements of the regulation. We will revise Sec. 682.402(e)(1)(iii)(A) to be consistent with the preamble discussion in the interim final regulations.

While we believe that the interim final regulations are fully consistent with the HEA and other laws, we are sympathetic to the concerns of the commenters. We intend to include this issue on the agenda for a future negotiated rulemaking to possibly consider other approaches.

Changes: Section 682.402(e)(1)(iii)(A) has been revised by adding the word ``not'' before the words ``pay reinsurance''.

Rehabilitation of Defaulted Loans (Sec. 682.405(a)(2)(i)(B))

Comments: Several commenters stated that the regulations for rehabilitation of a defaulted loan do not account for borrowers who make only sporadic payments before beginning the required number of qualifying payments to rehabilitate the loan. They also claimed that the regulations did not reflect the 20-day grace period for a timely payment as provided in the statute.

Discussion: We believe the regulations accurately reflect the HEA and Congressional intent. Borrowers must request, or in some fashion initiate, loan rehabilitation so that the period during which the 9 qualifying payments must be made is clear for both the guaranty agency and the borrower.Additionally, a reasonable and affordable payment amount needs to be established, and the consequences of loan rehabilitation, such as the addition of collection costs to the rehabilitated loan amount, the post-rehabilitation payment period and the likely increased payment amount, need to be explained to the borrower. Although the borrower can now make 9 qualifying payments over a 10 consecutive month period to rehabilitate a defaulted loan, a borrower should not be encouraged to make late payments or to miss a monthly payment as part of a loan rehabilitation agreement.

Changes: None.

Comments: One commenter noted that the original Sec. 682.405(b)(1)(ii) through (v) had been removed from the interim final regulations and asked if this was intentional.

Discussion: We thank the commenter for bringing this inadvertent drafting error to our attention.

Changes: We have reinserted these paragraphs and renumbered them accordingly.

Special Insurance and Reinsurance Rules (Sec. 682.415)

Comments: Some commenters asked the Secretary to interpret the change in the HERA that reduced the insurance percentage paid to lenders and lender servicers that have been designated as ``exceptional performers'' not to apply to loans for which the first disbursement was made before October 1, 1993. These commenters noted that, prior to October 1, 1993, the HEA required guaranty agencies to provide 100 percent insurance to lenders, but that rate was later reduced to 98 and 97 percent. Until enactment of the HERA, however, lenders or lender servicers who were designated as exceptional performers received 100 percent insurance on all claims. The HERA reduced the insurance for exceptional performers to 99 percent. The commenters argue that the HERA should not be interpreted to reduce the insurance on loans for which the first disbursement was made before October 1, 1993 to 99 percent for exceptional performers. The commenters also argue that to interpret the HERA to apply to loans for which the first disbursement was made before October 1, 1993, would violate the lenders' contractual and Constitutional rights.

Discussion: The Secretary does not agree with the commenters. The HERA amended section 428I(b)(1) of the HEA to provide that a lender or lender servicer designated for exceptional performance would receive 99 percent insurance on ``all loans for which claims are submitted for payment by that eligible lender or servicer for the one-year period'' for which the lender or lender servicer has been designated. In making this change, Congress eliminated all references to 100 percent insurance for exceptional performers. Congress did not retain the 100 percent insurance for any group of loans. Thus, there is no statutory basis for the Secretary to authorize 100 percent insurance on any claims submitted by an exceptional performer after the effective date of the HERA (July 1, 2006). The Secretary also does not agree that this change violates any contractual or constitutional rights of a lender. A lender chooses to apply for exceptional performer status because of the benefits it provides to the lender. A lender is not required to apply for such status or to retain such status after it has been granted. Moreover, Congress can modify the terms of the exceptional performer status or end it completely without any violation of a lender's rights. In the HERA, Congress chose to reduce the insurance coverage on loans held by exceptional performers that were made before October 1, 1993, apparently as a way of offsetting the overall costs of providing higher insurance coverage to exceptional performer lenders and lender servicers than to others. A lender or lender servicer that has been designated as an exceptional performer can still receive 100 percent insurance on loans disbursed prior to October 1, 1993 by relinquishing its exceptional performer status. By relinquishing its exceptional performer status, however, it will be accepting a lower insurance rate on all other claims.

Changes: None.

School as FFEL Lender (Sec. 682.601(a) and (b))

Comments: Many commenters asked that we clarify the regulations regarding a school lender's use of proceeds from the sale or other disposition of loans for need-based grants. These same commenters questioned the difference between the items identified in the parenthetical phrase in Sec. 682.601(a)(8) and those identified as not considered ``reasonable and direct administrative expenses'' in Sec. 682.601(b) and asked that these discrepancies be eliminated. One commenter requested that we identify the mandated costs of reduced origination fees and reduced interest rates as allowable, reasonable and direct administrative expenses for school lenders. A couple of commenters asked for guidelines on how a school lender should use loan proceeds for required need-based grants in a manner that would supplement, but not supplant non-Federal funds that would otherwise be used for need-based student grant programs. The commenters also noted that no definition of need-based grant was provided in the regulations. One of those same commenters also asked us to clarify that a school operating as a FFEL school lender would not be prohibited from providing assistance to its students, other than Stafford Loans, from institutional sources. Another commenter stated that required need-based grants from loan proceeds should be based on the school lender's actual net loan proceeds from the prior year.

One commenter suggested that Sec. 682.601(a)(9) be revised to clarify that the loans a school lender must make prior to April 1, 2006 be FFEL program loans. Another commenter asked us to clarify whether a FFEL school lender was required to conduct a separate independent audit of its lender operation.

Discussion: In reviewing the regulatory provisions that address the use of loan proceeds for need-based grants and allowable, reasonable and direct administrative expenses, we agree that further clarification is appropriate. We believe that certain FFEL school lender's mandated or required expenses can be characterized as programmatic expenses, but not as direct administrative expenses under the HEA. As a result, Sec. 682.601(b) specifies that reasonable and direct administrative expenses do not include the costs associated with securing financing, the cost of offering reduced origination fees or reduced interest rates to borrowers, or the cost of offering reduced Federal default fees to borrowers. However, we have decided to permit a school lender to exclude the costs of other statutorily mandated or necessary programmatic expenses from the calculation of ``proceeds from the sale or other disposition of loans'' that must be used for need-based grants. The parenthetical phrase in Sec. 682.601(a)(8) addresses this xclusion. Certain optional costs, such as reduced Federal default fees, are not covered by the exclusion from loan proceeds or as a reasonable and direct administrative expense.

A school that is also a FFEL Program lender should be able to demonstrate on an ongoing basis that there is no pattern or practice of reducing institutional funds available for use as non-Federal need-based grants or scholarships as a result of the availability of lender produced funds that must also be used for need-based grants. An institution's continued commitment to use institutional as well as school lending-produced proceeds for this purpose will demonstrate that the school is supplementing, not supplanting, institutional funds committed to need-based grants and scholarships. We will not dictate a specific approach a school lender must use to determine its budget for need-based grants from lending-produced proceeds. The lender must be able to show clearly that all proceeds from the sources listed in Sec. 682.601(a)(8), except for those authorized to be used for reasonable and direct administrative expenses and other required programmatic costs that can be netted from proceeds, are used for need-based grants. We understand that award commitments are made in advance of the start of the school's academic year and that this period does not generally correspond with the school lender's fiscal year. Determining the pool of funds available for need-based grants based on the school lender's immediately preceding fiscal year's lending performance, with an additional factor for increased proceeds based on increased loan volume, if applicable, would appear to be a reasonable approach. ``Need,'' for purposes of need-based grants, is documented need for Title IV, HEA program purposes. The provisions governing FFEL school lenders do not prohibit the school from making other forms of student financial assistance available to its students. As provided in Sec. 682.601(a)(7) and discussed in the preamble of he interim final regulations, a FFEL school lender must submit a compliance audit as a lender in accordance with the requirements contained in Sec. 682.305(c)(2) for any fiscal year in which the school engages in activities as an eligible lender, beginning with the first fiscal year beginning on or after July 1, 2006. School lenders subject to the Single Audit Act, 31 U.S.C. 7502, will be required under Sec. 682.601(a)(7) to include its FFEL Program lending activities in the annual audit and to include information on those activities in the audit report, whether or not the lending activities or the student financial aid programs are considered a ``major program'' under the Single Audit Act. Other school lenders will have to arrange for a separate audit of their lending activities using the Lender Audit Guide available through the Department of Education's Office of Inspector General. In making the changes to clarify the audit requirements, we determined that Sec. 682.305(c)(2)(v) and (vi) included outdated references to other Departmental regulations and audit requirements. We have corrected the citations to the audit requirements for governmental entities in Sec. 682.305(c)(2)(v). We have also added nonprofit organizations to Sec. 682.305(c)(2)(v), because amendments to the Single Audit Act apply the same requirements to governmental entities and nonprofit organizations. We have removed the separate discussion of audit requirements for nonprofit organizations in Sec. 682.305(c)(2)(vi) and replaced it with a cross-reference to the school lender audit requirements.

Changes: The requirement that school lenders have an annual audit in Sec. 682.601(a)(7) has been amended to clarify that, in addition, a school lender subject to the Single Audit Act must in addition during years when the student financial aid cluster, as defined in OMB Circular A-133 Compliance Supplement, is not audited as a major program, also audit the school's lending activities as a major program under the Single Audit Act. This additional requirement is without regard to the amount of loans made. We have also made technical corrections to Sec. 682.305(c)(2) as discussed above. Section 682.601(a)(8) has been revised to remove the words ``which does not include providing origination fees or interest rates at less than the fee or rate authorized under the provisions of the Act'' following the words ``need-based grants'' and before ``; and''. A technical change has also been made to Sec. 682.601(a)(9) to reflect the requirement that an eligible school lender must have made one or more FFEL program loans on or before April 1, 2006.

Processing Loan Proceeds (Sec. Sec. 682.604 and 685.304)

Comments: Several commenters recommended requiring entrance and exit counseling for graduate or professional students who borrow PLUS Loans. The commenters noted that a graduate or professional student PLUS borrower who has not also borrowed a Stafford Loan would never have had the benefit of Stafford Loan entrance or exit counseling. In addition, these commenters recommended that the exit counseling clarify the different repayment rules for PLUS loans and Stafford Loans. Two commenters suggested that graduate or professional students with both Stafford Loans and PLUS Loans could be exempted from the entrance counseling requirement for their PLUS Loans, because these borrowers would have already received entrance and exit counseling on their Stafford Loans.

Discussion: The HEA exempts PLUS Loan borrowers from exit counseling requirements. Although the Secretary encourages institutions to provide exit counseling to graduate and professional student PLUS Loan borrowers, the Secretary does not have the authority to require such counseling by regulation. With regard to entrance counseling, FFEL lenders are already required, under Sec. 682.205, to provide extensive disclosure information to borrowers before disbursing a loan. This disclosure information, which can be provided through either the rights and responsibilities statement or a plain language disclosure sent to the borrower, includes an explanation of when repayment of the loan is required. Lenders are also required to provide a disclosure to borrowers prior to the loan going into repayment. This disclosure must include the borrower's repayment schedule, the due date of the first installment payment, and the number, amount, and frequency of payments. For Direct Loans, the Department provides essentially the same information to borrowers that FFEL lenders provide under Sec. 682.205. We believe that these disclosures are sufficient for the limited number of graduate or professional student PLUS borrowers who have not received Stafford Loan entrance counseling.

Changes: None.

Comments: One commenter requested that PLUS Loans be covered in the overaward language in Sec. 682.604(h) because graduate and professional students are now eligible PLUS Loan borrowers.

Discussion: We agree with the commenter that the overaward language should be amended to include student PLUS Loans.

Changes: Section 682.604(h) has been amended to reflect this change. We have also made the same change in Sec. 685.303(e) of the Direct Loan Program regulations.

Borrower Eligibility (Sec. 685.200)

Comments: Several commenters recommended that we revise Sec. 685.200(b)(1)(iv) to allow a student Direct PLUS Loan applicant who is determined to have an adverse credit history to receive a Direct PLUS Loan if the student obtains an endorser who does not have an adverse credit history. The commenters noted that the endorser option is available to student PLUS applicants in the FFEL Program.

Discussion: We did not intend to deny student applicants for Direct PLUS Loans the option of obtaining an endorser.

Changes: We have revised Sec. 685.200(b)(5) of the regulations to more clearly reflect that a student Direct PLUS Loan applicant who is determined to have an adverse credit history may receive a Direct PLUS Loan if he or she obtains an endorser who does not have an adverse credit history, or documents to the satisfaction of the Secretary that there are extenuating circumstances.

Charges for Which Direct Loan Borrowers Are Responsible (Sec. 685.202)

Comments: Several commenters suggested that we revise Sec. 685.202(a)(3) to provide that the portion of a Direct Consolidation Loan that is attributable to Health Education Assistance Loan Program (HEAL) loans is subject to the same interest rate provision that applies to Federal Consolidation Loans under Sec. 682.202(a)(4)(v). The commenters noted that section 455(a)(1) of the HEA, as amended by the HERA, requires Direct Consolidation Loans and Federal Consolidation Loans to have the same terms, conditions, and benefits, unless otherwise specified in Part D of the HEA.

Discussion: The HERA amended the HEA to require that Direct Consolidation Loans have the same terms, conditions, and benefits as Federal Consolidation Loans, unless otherwise specified in the law. However, in this case, there is a specific interest rate provision for Direct Consolidation Loans in section 455(b)(7)(C) of the HEA, and that provision does not specify a different interest rate for the portion of a Direct Consolidation Loan that is attributable to HEAL Loans. Therefore, Direct Consolidation Loans are not subject to the provision that applies to Federal Consolidation Loans under section 428C(d)(2) of the HEA.

Changes: None.

Repayment Plans (Sec. 685.208)

Comments: Several commenters suggested that the HERA requires that the graduated and extended repayment plans do not require a borrower to repay the minimum amount allowed under statute. In addition, these commenters suggested that a borrower's monthly payments under these repayment plans must be at least the amount of interest and that we add a provision that would disallow single graduated payments that exceed three times any other graduated installment payment.

Discussion: We agree that the minimum annual repayment rules should not apply to a graduated repayment plan. The HEA exempts graduated and income sensitive repayment plans from the minimum annual repayment provisions. The HEA does not exempt extended repayment plans from the minimum annual payment requirement. In addition, the FFEL Program regulations state that graduated and income sensitive repayment plans may have installments less than the minimum. However, the FFEL Program regulations do not provide for extended repayment plans to have installments less than the minimum annual payment amount. The final regulations provide that the 10-year graduated repayment plan and the extended repayment plan can have graduated